Covid-19 is a bigger animal in the oil fight

Putting something on the back burner implies that there are at least two other burners. One really hot one, the other not so much.

Well that picturizes (yes, my word) where we find ourselves today. Thing is, we only have two burners, and right now they are both very, very hot.

I closed last week’s report by shrugging off the Russia/Saudi food fight over crude production with a simplistic solution: Get President Trump to unilaterally cut back U.S. shale oil production and everyone else will follow his lead. This would then increase the price of crude globally and save the shale oil industry as well as oilsands production.

It may sound simple to just turn down the U.S. shale taps, but that’s exactly where U.S. politics and the dividing line between state vs. federal jurisdiction gets smudgy.

The State of Texas is the source of 40% of the nation’s crude, and it’s the State of Texas that determines the level of supply, not Washington. If this has an Alberta vs. Ottawa ring to it, your hearing is perfect.

In anticipation of where Trump may be headed – with a cutback offer to the Russians and Saudis – the State of Texas is reluctant to support this notion until they get some guarantees from the other side internationally, and other states domestically, that they will play ball with a universal production cut.

Does this mean that the U.S. may be willing, (or is it forced?) to join the Saudis, which means becoming an OPEC member?

After years of the West pointing fingers at the cartel as being the bad guys in this – always manipulating crude prices and then pump and rack prices just when the driving season gets underway.

Are the bad guys now not so bad?

Will the U.S. – the world’s largest crude oil producer and refined products exporter — now regularly sit down with those former bad guys and start agreeing to a collusion and price fixing scheme that would determine the daily price of crude and ultimately your price of gasoline, diesel, and jet fuel costs?

At the time of this report, discussions along this line between the Saudis, Russians, and the U.S. have been put on the back, not-so-hot burner. But this may change and soon because the three blinded mice may have no choice but to collude and avoid the trap that Covid-19 has set for them.

Demand for crude and all refined products (with the exception of diesel) has not only been eroded, it has virtually evaporated.

With this reality kicking in, crude producers as well as refiners with no customers are now running out of storage for their unwanted products. Western Canadian Select is now priced at around $5/bbl but it gets worse as it cost $7 to $9/bbl to pipe it to the U.S. Gulf Coast refining hub.

No point getting crude out of the ground and sending it to your only customer when it could be losing $4/bbl for the privilege to do so.

It is generally agreed that the production break even point for a refinery is a run rate of 85%. Below that, there is little reason or financial logic to open the gates to the facility. In the U.S., the national run rate is now sitting at 87%.

Tick, tock.

Here in Canada, we have our first white flag as the 130,000 bpd come-by-chance refinery in Atlantic Canada announced an immediate two to five-month shutdown.

And more refinery closures will spread – all due to Covid-19.

We need some light in this very long and dark tunnel.

This can start if we can get the energy sector in the U.S. and Canada back to work.

To do this, the Saudis, Russians, and U.S. will have to bury the hatchet, knock their egos down a couple of notches and cut back production – now.

These three elephants have to understand that Covid-19 is a bigger animal than all of them combined, and the room is getting far too small.

It’s all of us who are getting squeezed.

~ The Grouch

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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